To fully realise the potential of natural capital, government mandates, rather than voluntary efforts, are essential, writes Rebecca Craddock-Taylor
Natural capital has been gaining momentum as a theme among investors over the past year and it is likely to play an increasingly important role in delivering financial and environmental benefits in future. But there is still a long way to go.
For natural capital to reach its potential in both areas, we need to see government regulation mandating its protection, in contrast to the predominantly voluntary approach we see at present.
Despite the growing appetite for certain natural capital assets such as forestry, there is a disconnect between nature’s true value and the value that our economy places on it. The world’s natural capital is estimated to be worth $125trn, yet it is currently valued at only $10trn in today’s active nature markets.
Only a small fraction of markets are currently designed to achieve nature-positive outcomes and many are in nascent stages, mostly allocated to on a voluntary basis.
Bridging this gap requires mandating reporting and mitigation strategies to encourage market participants to reduce negative impacts on nature and to provide the stable, long-term framework investors need to see before they commit to emerging investment solutions.
The new Labour government presents an opportune moment for the UK to develop its position as a global leader in natural capital by building on the existing mandatory regulatory frameworks for natural capital. The government has put sustainability at the top of its agenda through a series of announcements, but nature cannot be forgotten – it is inextricably linked to climate change, and we cannot tackle one without the other.
Investors are increasingly aware of the value of nature – upon which 55% of global GDP depends – and the ecological and financial risk posed by not allocating to it.
A Gresham House survey of 22 UK institutional investors showed that 50% are either already investing in natural capital or will do so within the next 18 months. The increasing demand we are seeing for forest-based solutions reflects this.
Forestry is a well-established asset class with a track record of high returns whilst having a positive correlation to inflation and diversification from other markets. In tandem with being an attractive investment, sustainably managed forests address key sustainability challenges – renewable building materials through timber production, carbon sequestration and storage, provision of a range of habitat types whilst facilitating habitat connectivity for local wildlife.
We have already seen the implementation of some mandatory frameworks and regulations such as the Task Force on Climate-related Financial Disclosures (TCFD) in 2022 and the introduction of Biodiversity Net Gain (BNG) through the Environment Act 2021 in early 2024.
The former bolstering demand for certain nature markets and the latter creating a new nature market in England. The TCFD framework mandates companies to evaluate their climate risks and take action to reduce them. Many have also started to set net-zero targets alongside TCFD reporting which is likely linked to the increased demand for forestry solutions – carbon credits from afforestation in particular.
The Environment Act requires developers to increase the biodiversity of a site by 10% – on or offsite – which has led to the development of BNG units, a market expected to be worth hundreds of millions of pounds annually in England.
This is a notable example of how the government has created a new natural-capital market by regulating positive outcomes for nature at integrated into development. To complement the implementation of these regulations, the TNFD [Taskforce on Nature-related Financial Disclosures] should also be mandated.
This first step will allow companies to understand their impact and dependencies on nature and clearly identify where they must take action to reduce negative impacts and improve the health and abundance of nature that affects their long-term value.
By introducing mandatory reporting and new regulation that puts nature’s prosperity at its core, demand for natural-capital markets should be stimulated, further reducing uncertainty and risk for investors.
Whilst the introduction of more frameworks and regulations demands substantial resources to implement, the cost of inaction is far greater. We stand at a crucial juncture where decisive action is needed to protect the health of the planet and the wellbeing of future generations.
Mandatory government regulations are not just bureaucratic necessity; they are a vital tool to provide the security and stability required to mobilise the investment needed to ensure the avoidance of further damage, reduction of unavoidable impacts, and restoration of natural habitats.
To read the latest IPE Real Assets magazine click here.
